Central Banks have effectively cancelled trillions of Dollars of government debt and are in the process of cancelling trillions more.

When a central bank creates money and buys a government bond, it is the same thing as cancelling that bond - so long as the central bank does not sell the bond and so long as it rolls it over when the bond matures. In other words, Quantitative Easing cancels government debt. That means the United States, the UK and Japan have far less government debt than is generally understood. The same will soon be true for the Eurozone governments. This has important policy implications that the world cannot afford to ignore.

The Federal Reserve has acquired $2.5 trillion of US government securities, nearly 14% of all US government debt. The US Treasury Department pays interest on that debt to the Fed. Then, at the end of every year, the Fed turns around and gives its profits to the Treasury, including the profits from the interest income earned on its government debt holdings. Last year, the US central bank gave the US government $97 billion, reducing the budget deficit by nearly 20%. It has given the government $500 billion since 2008. In other words, on the bonds held by the Fed, the government is paying interest to itself, which is the same thing as not paying any interest. Bonds that do not pay interest have been effectively cancelled. Seen in this light, the ratio of government debt to GDP in the United States is not 105%. It is 89%.

The UK government is paying interest to itself on the £375 billion of government debt owned by the Bank of England. That is 24% of all UK government debt. Since the Bank of England is unlikely to ever sell those bonds the ratio of government debt to GDP in the UK is actually 70%, rather than 92%, as it is now reported to be.

The Bank of Japan owns Japanese government bonds equivalent to 53% of GDP and it is acquiring new government bonds at roughly twice the pace that the government is selling them. When it is understood that Quantitative Easing is debt cancellation, the BOJ’s very aggressive QQE program makes sense. It may be the only way to prevent a fiscal crisis in Japan, where government debt is reported to be 245% of GDP. The more government debt acquired (and effectively cancelled) by the central bank, the less likely a fiscal crisis will be.

Fiat money creation on a large scale was supposed to cause very high rates of inflation, or even hyperinflation. It hasn’t because it has taken place at the same time that Globalization has been driving down the cost of labor in the developed economies. Under the Bretton Woods system, when trade between nations had to balance, aggressive fiat money creation would have over-stimulated the US economy (for instance), quickly leading to full employment, full capacity utilization and wage-push inflation. Under the Dollar Standard, trade no longer has to balance; so all domestic bottlenecks can be circumvented by buying from abroad. In our new global economy, two billion people live on less than $3 per day. That means we will not hit capacity constraints in labor, leading to wage inflation, for decades. And that, as the history of the past six years demonstrates, means that the central banks of the developed economies can create money and finance massive government budget deficits without causing inflation.

This combination of fiat money and Globalization under the Dollar Standard creates a once-in-history opportunity. The government debt owned by the central banks should be held permanently and perpetually rolled over, effectively cancelling it. It would then be clear that governments really have much less debt than is generally understood. The governments of the developed nations could then borrow more and invest that money in new industries and technologies to restructure their economies and to retrain and educate their workforce at the post-graduate level to ensure that the standard of living in the developed world continues to improve, rather than sinking down to third world levels. Furthermore, large investments in green technologies could be financed with GQE, Green Quantitative Easing, perhaps preventing an environmental catastrophe.

Heretical as it may appear at first impression, Quantitative Easing has already effectively cancelled trillions of dollars of government debt without causing inflation. At the very least, this fact completely undermines the case in favor of further growth retarding fiscal austerity. If this opportunity were fully exploited, investments could be financed that would not only restore global growth but that would also improve the wellbeing of everyone on this planet.

For all the details on how QE cancels government debt, watch this free Macro Watch video:

As regular readers know, we’ve variously described the China-led Asian Infrastructure Investment Bank as representing both an attempt by China to

Cement its regional dominance by implicitly adopting a sino-Monroe Doctrine, as indicative of Beijing’s desire to supplant to US-dominated multinational institutions that have been a fixture of the post WWII economic world order, and, perhaps most importantly,

As a not-so-subtle indication that dollar hegemony may be on the way out and yuan hegemony may be around the corner.

Essentially the AIIB will (either intentionally or unintentionally depending on who you believe) serve as an instrument of Chinese foreign policy and any hope of keeping this between the people who are privy to the country’s various hidden agendas (because all countries have agendas), went out the window early last month when the UK staged a coup by breaking with Washington and joining the development bank triggering a flood of applications from Western countries and culminating in membership bids from US “allies” Australia, Israel, and even Canada. Adding insult to injury, the AIIB is now looking to hire officials away from the World Bank and rival ADB.

Amid the March membership frenzy, Beijing sought to play down the degree to which the venture would serve to help establish a new world economic order with China at the helm. An article which appeared in The Global Times (a paper run by the state-controlled People’s Daily) very specifically denied any notion that China has designed on establishing a yuan-based global economic system. Here’s an excerpt:

The establishment of the Asian Infrastructure Investment Bank (AIIB) has been depicted by a few overseas media outlets as if China is building its own version of the Bretton Woods system...

Some foreign observers claim that the AIIB is the beginning of the Chinese yuan's hegemony. What they are actually trying to imply is that "China is another US."

This kind of statement is nonsensical, which uses historical experience to fool readers. It is divorced from the truth and shows no common sense and doesn't stand up to any scrutiny.

Through the Bretton Woods system, the US was able to wield supreme influence over its allies which had been severely battered during the war. China today is in a totally different position.

The AIIB will not confront the WB or IMF, nor will it turn the current international monetary order upside down. The spirit of the AIIB is diversity and justice.

Perhaps, but as we noted at the time, it was on the very same day that the following came across the wires:

“China plans to push for yuan to take prominence in loans under the Asian Infrastructure Investment Bank and the Silk Road Fund, people familiar with the matter said. China may encourage $100b AIIB and $40b Silk Road Fund to issue loans directly in yuan or set up yuan-denominated funds under the two institutions, according to the people, who ask not to be identified because deliberations are private.”

This prompted us to suggest that “actions speak louder than words.”

Today, The South China Morning Post reports that the bank will establish an AIIB currency basket with China set to push for the yuan to take a prominent role and for “special currency funds” to be established in order to issue yuan-denominated loans through the fund. Here’s more:

Beijing will push for the yuan to be included in a basket of currencies used to denominate and settle loans from the Chinese-led Asian Infrastructure Investment Bank (AIIB), according to think tank sources.

Beijing will also encourage the AIIB and the Silk Road Fund to set up special currency funds and issue yuan-denominated loans through both institutions, the sources said.

If the US dollar is used, it weakens China’s bid for the yuan to be a global currency.

The efforts are part of a drive to internationalise the Chinese currency and come as the International Monetary Fund prepares to discuss the possible inclusion of the yuan as its fifth reserve currency and as part of the basket that forms the IMF's Special Drawing Rights.

The sources' claims appeared to be confirmed by a state media report, which said that a basket of currencies called the "AIIB currency" would most likely be adopted as the bank's currency of settlement…

Hao Hong, chief economist and managing director of research at Bocom

International, said the AIIB's grand vision for infrastructure investment came with challenges but China should do its best to establish the yuan as a currency for settlement and denomination.

"If the US dollar is used instead, it weakens China's bid for the yuan to become a truly global currency and to challenge the hegemony of the US dollar," Hong said.

Yifan Hu, chief economist with Haitong Securities International, said it would be too hard to reach a consensus on an AIIB currency basket...

"In my view, the US dollar will be used in the early stages of the AIIB, and then [the bank] will gradually move to a mix of the yuan and US dollar," Hu said.

The sources said China would push for broader use of the yuan at the AIIB and the Silk Road Fund, as part of efforts to promote the yuan as an international currency…

The sources said that there was still a long way to go in the internationalisation of the yuan and the greenback would continue to dominate the global financial system for the next few years.

Yes, “for the next few years,” which really isn’t that long, especially when compared with how long the dollar has dominated the global economic order. Perhaps even more interesting — and more alarming for Washington — is that the move by China to expand the yuan’s influence via a fund that is now backed by nearly every major country on the planet save the US and Japan, comes just as petrodollar mecantilism, which has been perhaps the driving force behind dollar dominance for decades, crumbles in the face of slumping oil prices.

As we’ve reported on several occasions,

2014 marked the first year in nearly two decades that oil producers' petrodollar exports (i.e. the recycling of oil proceeds into USD assets) turned negative.

In other words, falling oil prices mean producing nations are now removing liquidity from the system rather than adding it, a process Goldman estimates will will sum to nearly $900 billion by 2018.

The combination of these two forces could serve to cause a dramatic shakeup in a world that heretofore functioned on a unilateral system, both politically and economically.

We are grateful to Alexander Giryavets at Dynamika Capital for pointing us to something which is far more troubling than even the Atlanta Fed's collapse in Q1 GDP tracking: namely the latest Credit Managers Index for the month of March which "deteriorated significantly over the last two months and current readings stand at the recessionary levels not seen since 2008."

To be sure, we have previously shown the collapse in consumer debt as reported by the Fed, which as we noted, just suffered its worst month for revolving credit since December 2010 and explains "why the consumer has literally gone into hibernation - it has nothing to do with the weather, and everything to do with the unwillingness to "charge" purchases, which in turn is a clear glimpse into how the US consumer sees their financial and economic future."

It turns out it may not have been just a matter of demand: apparently something very dramatic has been happening in February and especially in March. Instead of spoiling the punchline, we will leave it to the National Association of Credit Managers to explain what happened:

We now know that the readings of last month were not a fluke or some temporary aberration that could be marked off as something related to the weather. There is quite obviously some serious financial stress manifesting in the data and this does not bode well for the growth of the economy going forward. These readings are as low as they have been since the recession started and to see everything start to get back on track would take a substantial reversal at this stage. The data from the CMI is not the only place where this distress is showing up, but thus far, it may be the most profound.

You mean it wasn't the weather? "As was the case last month, the majority of the damage was seen in the service sector and this month it is going to be hard to blame it all on the weather or some other seasonal factor."

Ok, good to know that we were correct in mocking all those "economisseds" who say the recent collapse in seasonally-adjusted (as in adjusted for the seasons... such as winter) data was due to the, well, winter, a winter in which 3 of 4 months were hotter than average!

So what is going on? Well, nothing short of another recession it appears.

The combined score is getting dangerously closer to the contraction zone and has not been this weak in many years (going back to 2010). It is sitting at 51.2 and that is down from the 53.2 noted last month. For most of the last two years, these readings have been in the mid-50s and above—comfortable territory and generally trending up from one month to the next and now there is a very disturbing trend downward. The index of favorable factors slipped substantially, but remains in the mid-range at 55.4. That would be seen as better news if it were not for the fact that these readings had consistently been in the 60s during the last couple of years. It was only August of last year when the reading was a robust 63.8. The most drastic fall took place with the unfavorable factors that indicate the real distress in the credit market. It has tumbled from 50.5 to 48.5 and that is firmly in the contraction zone—a place this index has not been since the days right after the recession formally ended. The signal this sends is that many companies are not nearly as healthy as it has been assumed and that there is considerably less resilience in the business sector than assumed.

Of course, in a world in which the only economic growth comes as a result of new credit entering the economy (as opposed to Fed reserves being stuck in the S&P), the only thing that matters is how easy it is to get credit into the hands of those who need it. As it turns out it has never been more difficult to get credit.

No really!

According to the CMI, the Rejections of Credit Applications index just crashed the most ever, surpassing even the credit crunch at the peak of the Lehman crisis.

This can be seen on the chart below.

And without any new credit entering the economy, a recession is all but assured.

More details on what may be the most critical and completely underreported indicator for the US economy. The report continues, with such a dire narrative that one wonders how it passed through the US Ministry of Truth's propaganda meter:

By far the most disturbing is the rejection of credit applications as this has fallen from an already weak 48.1 to 42.9. This is credit crunch territory—unseen since the very start of the recession. Suddenly companies are having a very hard time getting credit. The accounts placed for collection reading slipped below 50 with a fall from 50.8 to 49.8 and that suggests that many companies are beyond slow pay and are faltering badly. The disputes category improved very slightly from 48.8 to 49, but is still below 50. This indicates that more companies are in such distress they are not bothering to dispute; they are just trying to survive. The dollar amount beyond terms slipped even deeper into contraction with a reading of 45.5 after a previous reading of 48.4. The dollar amount of customer deductions slipped out of the 50s as it went from 51.8 to 48.7. The only semi-bright spot was that filings for bankruptcies stayed almost the same—going from 55.0 to 55.1. This is the one and only category in the unfavorable list that did not fall into contraction territory and that suggests that there are big, big problems as far as the financial security of these companies are concerned.

For those who enjoy tables, here it is:

Just in case there was still confusion about what is truly going on when one strips away the daily "S&P500 is at all time highs" propaganda and iWatch infomercials, here is some more doom and gloom from the source:

As stated earlier, the real concerns start to manifest with the unfavorable categories. The rejections of credit applications fell out of the 50s with a resounding thud—going from 50.3 to 43.8. There is most definitely a credit crunch underway and it is now easy to determine what the prime factor is. There are many companies seeking credit that are too weak and there is obviously an abundance of caution showing up in those that issue that credit. The accounts placed for collection held fairly steady and that comes as a bit of surprise—it went from 51.8 to 51.4. The disputes category actually improved a little—going from 47.2 to 48.6, but the important point is that it is still in the contraction category. The dollar amount beyond terms slid drastically from 52.2 to 46.0 and the dollar amount of customer deductions remained stable but at a low rate—moving not at all from the 48.7 that was noted last month. There was also no change in the filings for bankruptcies as it stayed right at 55.1—same as last month.

The big news is access to credit. It is suddenly very hard to get and this looks like the situation that existed at the start of the recession in 2008. The overall economy didn’t look all that bad in late 2008, except that there was a dearth of credit and that soon led to business failures and struggles.

...

The pattern is the same whether one is discussing the manufacturing or service side—too many seeking credit that are not going to get what they are seeking—either because there are doubts as to their credit status or because those issuing credit are in a very cautious mood. The dollar collections category is more or less stable and still in the 60s—it went from 61.0 to 60.4.

And the stunner:

The rejections of credit applications is as miserable as it has been since the depths of the recession—going from 45.9 to 42.0.These are very bad readings and it will take a good long while to climb out of this mess.

Can you arbitrage time? Central banks made the whole world “buy time”. There are signs that we’re beginning to sell it

Central banks artificially lengthened time horizons in financial markets and the real economy by distorting time preference. There is evidence that time horizons are now shortening, e.g. weak capital investment, flattening yield curves, dollar strength & physical gold demand. Perhaps the tsunami of global speculative capital—a result of extreme “financialism” - is getting nervous and seeking safer havens. Historically, volatility in currency markets has led to destabilising flows in speculative capital which have subsequently impacted other financial assets. One way to “sell time” is, paradoxically, buying long-term Treasuries and, therefore, “bond-like” equities, such as financially strong Consumer Staples and Utilities companies. For equities in general, we found two indicators which gave well-timed sell signals at the last two peaks in the S&P 500 in 2000 and 2007. Both of them – Treasury yield curve (7s10s) and “adjusted” MACD - are getting close to giving the first sell signals in nearly eight years.

Executive Summary

Can you buy and sell time? We think that you can from the perspective of time horizons. In our view, financial markets are operating on the wrong time horizon – one that is too long (thanks to central banks ZIRP/NIRP and credit creation) - although there are signs that this is beginning to change.

We are in a global debt bubble and debt has a “time function” given its ability to bring forward consumption from the future into the present. Debt essentially “buys time” and the world has bought a (hell of a) lot of time. The “present” is inexorably catching up with what was the “future.”

Time preference reflects the relative valuation placed on goods at an earlier date versus a later date. While current goods (including cash) should always have a higher valuation than future goods, time preference declines as an economy becomes wealthier, i.e. the proportion of income devoted to current consumption falls versus that devoted to saving/capital accumulation.

Since the crisis, central banks have sought to address “under-consumption” (how many people do you know who voluntarily under-consume?) by distorting time preferences in the real economy and financial markets via zero interest rates and excessive credit creation. Negative interest rates are another step in this direction. At the heart of their policy, however, is a fundamental contradiction.

On one hand, their policies seek to increase current consumption, at the expense of long-term saving & capital accumulation, in an over-leveraged world. This increases time preference and would normally equate with higher interest rates, shortening time horizons and diminution in wealth.

However, by forcing down interest rates, the substitution of savings (real wealth) by cheap credit and by supporting financial markets, they have created an impression that time preference is lower than it really is. This lengthens time horizons, implies that current/rising consumption levels are more easily sustainable and induces incorrect spending decisions.

While artificially increasing time preference fundamentally weakens an economy, there is no immediate concern unless there is evidence that businesses, consumers and investors are recognising that time preference is too high and are responding accordingly.

We detect signs that time horizons are shortening in both the “real” economy and financial markets.

* * *

Time, Debt and Central Banks

We are in a global debt bubble and debt brings forward consumption into the present from a more distant point in the future – since it removes the need to save the loan value out of disposable income.

Consequently, the accumulation of debt has a time function.

Debt essentially “buys time”, so borrowers are literally “long” time and short the currency/credit which they must return to the lender at a later date. While lenders lend money, they are also “lending” or “selling” time to the borrowers.

While it has a geared effect on economic growth, “buying” more and more time becomes problematic.

As time progresses, what is “the present” begins to catch up with what was “the future.”

In the US, total credit market debt outstanding is US$58.0 trillion, or $62.4 trillion if you include the Fed’s balance sheet. At 331.7% of GDP, it is significantly higher than the 275% reached at the peak of the Great Depression.

What deleveraging?

It’s noticeable how central bankers almost never mention that TOO MUCH DEBT is the key factor holding back growth in what is a credit-driven global economy. This is the sleight of hand to deflect guilt. In fact, their strategy has been to address the fallacy (think about it) of under-consumption by an all-out attempt to make it cheaper to borrow so that the world accumulates even more debt.

And the US is only a part of the story.

The total amount of debt accumulated on a global basis is approximately US$200 trillion according to a recent report from the management consulting firm, McKinsey.

The world is “long” (a hell of) a lot of time.

Looked at in another way, central banks have artificially lengthened time horizons in the real economy and financial markets by distorting time preference. They have created an illusion at the heart of which is a fundamental contradiction.

Time preference is the relative valuation placed on goods (including money) at an earlier date versus a later date. It almost goes without saying that, in general, people would rather fulfil their desires today than tomorrow. Who wouldn’t? People value present goods more highly than future goods. This concept is obviously used in DCF calculations to value financial assets/projects, i.e. cash flows at an earlier date have a higher valuation than cash flows at a more distant date.

In an economy, the way that time preference alters the balance between consumption today versus saving/investment for the future - and how debt accumulation interacts with this process – has major implications for growth. As an economy becomes wealthier, time preference declines.

Time preference plays a key role in the formation of interest rates along with diminishing marginal utility (e.g. if you were on a desert island with nothing but 2 bananas, it probably makes sense to eat the other one tomorrow).

Implicit in time preference is that interest rates should be positive. Borrowers have to compensate lenders for the use of cash now if they don’t want to (or can’t) save it out of disposable income. Lenders require positive interest rates to defer consumption over and above some level of precautionary cash reserve.

Negative interest rates violate the normal concept of time preference, implying the premium of present goods to future goods is reversed. A person who saves SFr100 and gets SFr 99 back in a year’s time must judge that the value of SFr 99 for consumption in a year’s time is more than SFr100 now.

Switzerland was the first country to see its 10-year yield slip into negative territory.

More than 15% of all developed market sovereign bonds are now trading on a negative yield. Swiss yields are currently negative out to nine years, German yields out to six, Danish out to five and Swedish out to four.

This strikes us as an extraordinary market signal. How could things have become so distorted and why is the consensus view so complacent? It seems that as long as stock markets are buoyant and sovereign bond yields of major nations remain very low, the majority will bask in the status quo.

Many suggestions are being put forward to explain negative yields so far out on the curve.

Rising deflation risk;

SNB’s negative policy rate (reduced from 0.00% to -0.75% since December 2014);

A shift towards “safe” assets as some investors question the future stability of the current financial architecture;

Limited guarantees on bank deposits and risks to the banking system;

A view that Swiss government bond prices will continue rising, so there will be an opportunity to sell them at a higher price to someone else;

The financial system has been so distorted by central banks that it’s almost impossible to value anything even with a degree of objectivity any more; and

Asset prices are increasingly driven by flows of capital as markets try to front-run changes in central bank policy.

All might be contributing, to a greater or lesser extent, but most are reflecting economic weakness and/or risk aversion on one hand and extreme policies of central banks on the other.

In contrast to the Fed, BoJ, BoE and (now) the ECB, the Swiss National Bank has never bought its own sovereign bonds. Nor should we forget that there are still alternative sovereign bonds with respectable credit ratings and much higher (it’s all relative) yields, e.g. US Treasuries. Yet the yield differential has not been arbitraged away, or at least not yet. And if it was, which way would it go?

What’s happening made us think about time preference and the way in which it is being distorted.

An increase in time preference implies that a higher ratio of income is devoted to consumption versus saving/investment for the future.

It should be obvious that this is precisely the aim of central bank policies to “correct” what they view as under-consumption. At its heart is a cynical inducement for businesses and consumers to make what are, in some cases, incorrect or risky spending decisions. Increasing consumption when savings ratios are low and debt is high suggests that central banks are trying to create the illusion that time preference is lower/falling when it’s actually higher/rising.

If we look at the US, for example, while debt is at an all-time high, the savings ratio is at a very low level by historical standards.

The problem becomes clear when you think more deeply about rising time preference in an economy. An increase in time preference means a corresponding reduction in saving. Saving/investment, in case we forget these days, is the basis of wealth creation, i.e. the creation and productive application of surplus. An economy with a time preference of 100% would spend all of its income on consumption and would never have any surplus for capital investment in order to increase its standard of living. Indeed, in no way is it an exaggeration to say that it was only by lowering time preference that civilisation was possible.

In normal circumstances, the more that time preference is raised, the more people live a hand-tomouth (or “paycheck to paycheck”) existence. Current levels of consumption become harder to sustain, there is less confidence in the future and time horizons shorten. In this environment, capital investment, which is the basis for wealth creation, suffers. All things being equal, high time preference would normally equate with higher interest rates as borrowers compete for scarce funds and need to offer high rates to induce people into saving.

Time preference tends to be higher for the very old, the very young, people living in less developed societies and for individuals and entities which are heavily indebted (which increasingly includes governments).

In extreme cases, it can be associated with a rise in central planning, “big government”, the subversion of property rights and rule of law and when a system starts decaying towards socialism.

Venezuela is an example of this. In such circumstances, governments “kill” productive investment, there is hoarding/shortages and capital flight emerges. What about the opposite situation?

When time preference is low or declining, a smaller ratio of income is devoted to consumption versus savings and investment. This implies a comfortable level of financial “surplus”. Current levels of consumption should be sustainable and time horizons lengthen due to greater confidence in the future. Abundant savings implies lower interest rates for borrowers. Businesses and entrepreneurs react to the higher savings/confidence with new capital investment, particularly in higher orders of production which are more distant from the final consumer. This includes natural resources, like oil & gas and metals and mining, and capital goods projects.

In a big picture sense, time preference tends to decline when a society experiences a broadly-based rise in wealth/capital accumulation. It is often associated with other factors such as technological progress, free-market capitalism, “small” government, the respect for property rights and the rule of law.

This was Douglas French writing in “High Rises and High Time Preferences”.

“The lower the time preference rate, the earlier the onset of the process of capital formation, and the faster the roundabout structure of production will be lengthened. Civilization is set in motion by individual saving, investment, and the accumulation of durable consumer goods and capital goods.”

It should be clear how central banks are attempting to distort time preference and how their policies contain a fundamental contradiction in terms of time horizons and wealth creation. In essence, they are creating an illusion.

While aggressively seeking to increase time preference, with all its negative implications, on the one hand, they are trying to give the impression that time preference is lower than it really is by making current levels of consumption seem more sustainable by forcing down interest rates and replacing savings with cheap credit. This artificially extends time horizons and increases confidence. But, lest we forget, a rising time preference is indicative of a weakening economy, not a strengthening one, and one which is more vulnerable than it looks.

It doesn’t take a genius to realise that the end result of trying to artificially lower time preference is to exacerbate the volatility of the business cycle and financial markets.

We know the result.

Each bubble is bigger than the last because the recovery from the previous bubble requires even lower interest rates and more credit creation…which induces some businesses and consumers to make a new round of risky spending decisions…and eventually…investment decisions.

There comes a point when the illusion should start to fade. The average person will start to realise that, in spite of historically low interest rates and all around central bank largesse, their time preference is not that low. In fact, it’s been rising and increasing it further would be irresponsible. Time horizons will shorten and risk increases.

The focal point of the last bubble was US house prices and associated securitised loans. House prices, which (according to Bernanke) were never supposed to fall, but were already falling more than a year and a half before Lehman collapsed.

This got us thinking about what signs we should we look for to tell if the central banks’ time preference illusion is running out of road.

American Thinker posted essay emphasizes the negative, long-term effects of massive money printing through quantitative easing (QE) & of the zero interest rate policy (ZIRP) .. it's all about the financial repression of interest rates - the thinking being that if this were not done, the pain of allowing the free markets to determine interest rates would be unbearable -

"One need only imagine the bipartisan political panic were the interest paid by the U.S. federal government on its debt to double or triple, squeezing out hundreds of billions of dollars of spending on military and social programs. It is becoming ever more obvious to ever more people that sustaining these 'financial repression' policies is making economies ever more comatose; ever less dynamic. Exactly when the accumulating long-term economic damage becomes more onerous to central bankers and politicians than the short-term damage of ending QE and ZIRP can’t be known. But that inflection point will come, desired or not; willed or not. It is not avoidable."

If the world’s central bankers are successful in pursuit of their short-term goals by the use of Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP) -- winning the race to the bottom in currency devaluation to the cheers of economically dogmatic, faux-literate media -- these bankers can’t then avoid being failures over the intermediate and longer terms in the race to attract productive, job creating investment.

Global central banks cut their euro holdings by the most on record last year to help mitigate losses ahead of the European Central Bank's (ECB) QE. The euro now accounts for just 22% of global reserves, down from 28% before the EU's debt crisis five years ago, according to the International Monetary Fund (IMF). "As a reserve currency, the euro is falling apart," says SocGen's Daniel Fermon. The numbers may be music to (ECB Chairman) Mario Draghi's ears -- a cheaper currency is theoretically a more competitive one.

There is no argument now that what has been and is currently missing from the global economic recovery is private market investment in the means of production -- land, building, equipment, productivity-related technology, and software. Attempts in the last 7 years by governments to tax, print, borrow, and regulate their way to prosperity are ever more clearly the reason that this private market investment has been and is being delayed, deferred and cancelled.

No sane corporate manager invests long term into a currency that is being persistently undercut by official doctrines -- QE and ZIRP -- nor into an economy undermined by unpredictable waves of regulation and potentially confiscatory tax regimes.

This cause and effect is now being denied only by the most dogmatic of progressive ideologues and blindest “social economists”.

Despite the obvious, the central bank of every major country on the planet currently has one or both of these programs in force. The U.S. Fed has, to it credit, ended QE. It is clear, however, that ending ZIRP is going to be a difficult and painful process. And there are more than a few smart observers who think ZIRP will never voluntarily end in the U.S. -- nor in Japan, nor in Europe. Their judgment is that the pain of allowing the free markets to retake control of the level of interest rates of intermediate and long maturity bonds, called ending ‘financial repression’, will prove unbearable. One need only imagine the bipartisan political panic were the interest paid by the U.S. federal government on its debt to double or triple, squeezing out hundreds of billions of dollars of spending on military and social programs.

It is becoming ever more obvious to ever more people that sustaining these 'financial repression' policies is making economies ever more comatose; ever less dynamic.

Exactly when the accumulating long-term economic damage becomes more onerous to central bankers and politicians than the short-term damage of ending QE and ZIRP can’t be known. But that inflection point will come, desired or not; willed or not. It is not avoidable.

Michael Booth, often posting and commenting as Cato, lectured in finance and economics at the Univ. of Texas, and worked for 20 years as an independent contractor and managerial trainer on financial topics in the technology industry.

Tipping Points Life Cycle - ExplainedClick on image to enlarge

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

THE CONTENT OF ALL MATERIALS: SLIDE PRESENTATION AND THEIR ACCOMPANYING RECORDED AUDIO DISCUSSIONS, VIDEO PRESENTATIONS, NARRATED SLIDE PRESENTATIONS AND WEBZINES (hereinafter "The Media") ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY.

The Media is not a solicitation to trade or invest, and any analysis is the opinion of the author and is not to be used or relied upon as investment advice. Trading and investing can involve substantial risk of loss. Past performance is no guarantee of future returns/results. Commentary is only the opinions of the authors and should not to be used for investment decisions. You must carefully examine the risks associated with investing of any sort and whether investment programs are suitable for you. You should never invest or consider investments without a complete set of disclosure documents, and should consider the risks prior to investing. The Media is not in any way a substitution for disclosure. Suitability of investing decisions rests solely with the investor. Your acknowledgement of this Disclosure and Terms of Use Statement is a condition of access to it. Furthermore, any investments you may make are your sole responsibility.

THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Gordon emperically recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, he encourages you confirm the facts on your own before making important investment commitments.

DISCLOSURE STATEMENT

Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

Please note that Mr. Long may already have invested or may from time to time invest in securities that are discussed or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

FAIR USE NOTICEThis site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.

If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.